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Management Speaks, Investors Listen: Are Investors Too Focused on Managerial Disclosures?

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  • Lisa Koonce
  • Nick Seybert
  • James Smith

Abstract

Market regulators are concerned about the completeness of management-provided explanations in financial reports and other venues. In particular, the Securities and Exchange Commission has articulated the growing problem of firm managers selectively emphasizing information that is favorable to their firm's financial status. In this two-experiment study, we examine whether investors are adversely influenced when firm managers provide only a partial explanation for a firm's financial outcomes, even though the investors have information about all of the causes for a firm's financial outcomes. Our results reveal that investors are misled by partial management explanations. We demonstrate that this effect occurs in situation both when qualitative information is known about the causes and when quantitative information is known about the causes. We document that one way in which this overreliance on management-provided partial information can be mitigated is when investors are provided with a quantitative analysis of the management explanation; with this quantitative analysis we observe that investors are able to distinguish between partial and complete explanations. Our study has implications for regulators and researchers.

Suggested Citation

  • Lisa Koonce & Nick Seybert & James Smith, 2016. "Management Speaks, Investors Listen: Are Investors Too Focused on Managerial Disclosures?," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 17(1), pages 31-44, January.
    • Handle: RePEc:taf:hbhfxx:v:17:y:2016:i:1:p:31-44
    DOI: 10.1080/15427560.2016.1133623
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    Cited by:

    1. Banerjee, Ameet Kumar & Akhtaruzzaman, Md & Dionisio, Andreia & Almeida, Dora & Sensoy, Ahmet, 2022. "Nonlinear nexus between cryptocurrency returns and COVID-19 news sentiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 36(C).
    2. Amanda Sanseverino & Jimena González-Ramírez & Kelly Cwik, 2024. "Do ESG progress disclosures influence investment decisions?," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 21(1), pages 107-126, March.
    3. Martin, Rachel, 2019. "Examination and implications of experimental research on investor perceptions," Journal of Accounting Literature, Elsevier, vol. 43(C), pages 145-169.

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